You place an order for 1,200 units of widgets at a unit price of $19.99.The supplier offers terms of 2/5,net 20.If you don't take the discount,how much interest on your order are you paying implicitly?
A)$468.33
B)$479.76
C)$492.00
D)$460.04
E)$564.80

Question

Quizplus · Accepted Answer

The total cost of the widgets is:

$19.99 x 1,200 = $23,988

If you take the discount, you can pay:

$23,988 x 0.98 = $23,488.24

The amount of the discount is:

$23,988 - $23,488.24 = $499.76

If you don't take the discount, you have to pay the full amount within 20 days. So the implicit interest rate can be calculated as follows:

Interest = Total Cost x Implicit Interest Rate x Time

$19,988 x Implicit Interest Rate x 20/365 = Interest

Implicit Interest Rate = Interest / ($19,988 x 20/365)

Implicit Interest Rate = Interest / $1,099.68

Implicit Interest Rate = $499.76 / $1,099.68

Implicit Interest Rate = 0.4547 or 45.47%

Therefore, the implicit interest on your order is:

$23,988 x 0.4547 x 20/365 = $479.76

The best choice is not to take the discount, as the implicit interest rate of 45.47% is much higher than any reasonable interest rate. Thus, the total cost of the widgets without the discount is $23,988, and the implicit interest on the order is $479.76.

You Place an Order for 1,200 Units of Widgets at a Unit